Price Versus Production Postponement: Capacity and Competition

Abstract

T his article presents a comparative analysis of possible postponement strategies in a two-stage decision model where firms make three decisions: capacity investment, production (inventory) quantity, and price. Typically, investments are made while the demand curve is uncertain. The strategies differ in the timing of the operational decisions relative to the realization of uncertainty.We show how competition, uncertainty, and the timing of operational decisions influence the strategic investment decision of the firm and its value. In contrast to production postponement, price postponement makes the investment and production (inventory) decisions relatively insensitive to uncertainty. This suggests that managers can make optimal capacity decisions by deterministic reasoning if they have some price flexibility. Under price postponement, additional postponement of production has relatively small incremental value. Therefore, it may be worthwhile to consider flexible ex-post pricing before production postponement reengineering. While more postponement increases firm value, it is counterintuitive that this also makes the optimal capacity decision more sensitive to uncertainty. We highlight the different impact of more timely information, which leads to higher investment and inventories, and of reduced demand uncertainty, which decreases investment and inventories. Our analysis suggests appropriateness conditions for simple make-to-stock and make-to-order strategies. We also present technical sufficiency and uniqueness conditions. Under price postponement, these results extend to oligopolistic and perfect competition for which pure equilibria are derived. Interestingly, the relative value of operational postponement techniques seems to increase as the industry becomes more competitive.

The Effect of Bidimensional Power Structure on Supply Chain Decisions and Performance

“…Banker et al [2] investigated the effect of competitive intensity on the equilibrium levels of quality and their study found that the relationship between quality and competitive intensity depends on the increased competition and other parameters. Van Mieghem and Dada [43], in their study of the value of various forms of postponement, developed a single period model for retailers offering a homogeneous good.…”

Leveraging uncertainty through backorder

“…Anupindi and Jiang (2008) develop the optimal capacity, production and pricing decisions in a duopoly setting. Van Mieghem and Dada (1999) shed light on the relative value of production postponement and price postponement under demand uncertainty. Anderson et al (2006) highlight the efficacy of backorders relative to other instruments in mitigating the impact of stockouts.…”

Coordinated decisions for substitutable products in a common retailer supply chain

“…The retailer will receive her orders or a portion of her orders, depending upon the actual capacity allocation of the suppliers, before the selling period. Note that there is no price and production postponement in our model, i.e., the retailer must decide unit sales prices and order quantities before actual supply or demand is realized (Van Mieghem and Dada, 1999). In this study, we let q i ¼ z i  d i , where z i is the stock factor of product i (Petruzzi and Dada, 1999;Wang et al, 2004;Weng, 1997).…”